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WILL BRAZIL'S FISCAL
AUSTERITY PLAN THREATEN
CARDSOS'S RE-ELECTION BID?
Prepared by Technical Data
A Division of Thomson Financial Networks
Brazil's unveiling of a fiscal belt tightening plan on November 10 left market players in Sao Paulo and New York cheering. The move eased concerns over the country's deteriorating fiscal health while averting what had seemed to be a nearly imminent currency devaluation. The IMF and IDB also provided their seals of approval, lauding the boldness of the Fernando Henrique Cardoso regime. However, with the 50-point plan–which includes slashing the federal payroll, cutting government spending and raising taxes and fuel prices–expected to plunge the country into a recession by Q1 1998, observers are left wondering what the move will do for Cardoso's re-election aspirations. The political costs are yet to be seen.
Prior to the unveiling of the fiscal austerity plan, President Cardoso had been viewed as a virtual shoo-in for a second term in office. A mid- September poll by the Public Opinion Institute gave Cardoso a strong 54% public approval rating as the country's economic outlook improved as a result of the administration's “Plano Real” economic stabilization program. The plan, launched in 1994, was responsible for going from hyper-inflation of 50% per month to monthly CPI rises of under 1%. It also restored stability to an economy once characterized by runaway price hikes, high unemployment, a shaky currency and prohibitive lending rates.
It is little surprise, therefore, that Cardoso's greatest following has typically been among the poorest sectors–the very same groups that will likely bear the brunt of the recent measures. So far, with most of the measures contemplated in the austerity plan not implemented as of yet, popular support for the program seems steady. A November 12 survey in the Correio Braziliense daily newspaper in Brasilia noted 55% of respondents felt the measures were needed, while 27% disagreed. The same survey, nevertheless, showed 88% of respondents were concerned over the potential boost in unemployment as a result of the plan's recessionary impact; the program calls for 33,000 public sector layoffs and elimination of 70,000 unfilled federal jobs.
Once the measures begin to be implemented, public sentiment is likely to sour. The austerity package, which comes on the heels of the central bank's doubling of interest rates to support the currency amid the market meltdown, may be encouraging for investors but may be a pill too bitter to swallow for the general populace (i.e., voters). Another survey by the Datafolha group published in the Folha de Sao Paulo daily newspaper on November 12 found that 57% of respondents in the industrial capital of Sao Paulo rejected the government plan. Only 28% said they would vote for Cardoso if elections were held today, versus the 33% who expressed support for the President in a similar poll taken in June.
The Jornal do Brasil newspaper published another poll by the Instituto Gerp which shows respondents in Rio de Janeiro are also not encouraged by the austerity plan. The poll showed 37% of respondents felt the government was “bad” or “terrible” (up from a previous 29%), while only 21% felt it was “good” or “excellent” (down from 31%). Fifty-four percent felt the new measures would ultimately hurt Cardoso's re-election effort.
In order to assess what the final toll on the Cardoso re-election bid will be as the presidential campaign gets underway for the October 4, 1998 elections, market players will have to watch two factors rather closely over the next few months. The first will be how soon the effects of the recession are felt and how deeply they impact middle and lower classes. The other factor will be how aggressive opposition leaders are in mounting a campaign against the government. This move will be made more difficult by the fact that opposition lawmakers themselves had been calling on the administration to introduce similar measures which, although unpopular, were aimed at maintaining long-term stability. Nevertheless, there is still some doubt as to whether opposition legislators will allow the full package of austerity measures to be implemented, as some require congressional approval.
In terms of how deep the recession will run, investment banks have been quick to revise their GDP forecasts downward in the wake of Brasilia's announcement. ING Barings was among the first to slash its 1998 forecast to no more than 2% from 3.5%. UBS cut its forecast to 2.5% from a previous 3.8%, while Morgan Stanley Dean Witter revised its prediction down to 1%-2% from 3%. Finance Ministry economists say they do not expect the economy to grow by any more than 2% next year, from a previously bullish 4% estimate. There are concerns that the recession could unleash a regional downturn. This possibility has already struck fear among Argentines who expect exports to Brazil, their main trading partner, to diminish. UBS now estimates Latin American growth at 4% next year versus its initial 4.7% expansion forecast.
Opponents will have to come up with an economic program that is even better than Cardoso's if they are to have any chance of snatching the presidency away from him. The prospects for their coming up with a brilliant package to counter Cardoso's appear slim. Cardoso has, in fact, stolen some of the opposition's potential thunder by implementing many of the measures which they had themselves been proposing. He has presented an image of a chief executive who has taken charge of the country's economy–albeit through painful sociopolitical means–to keep it from succumbing to the global market debacle. While Cardoso's campaign platform is still expected to focus on his administration's economic achievements, the opposition's often populist rhetoric may gain more supporters than it had until recently. However, this may still not be enough to derail the re- election bid, as opponents will not likely provide viable economic alternatives.
Yet, the ultimate obstacle remaining for a Cardoso victory next year would be further delays in getting congressional approval for his much-awaited structural reforms–considered key components of his economic stabilization drive. Observers agree that with the fiscal austerity measures in place, there will be less room for congressional opposition to the reforms, as lawmakers had previously questioned whether it was wise to implement such reforms if the fiscal deterioration and foreign exchange situation was not addressed first. If reforms are passed, there is little reason for opposition. Although a landslide may no longer be likely as voters cast their ballots with their pocketbooks in mind, Cardoso's re-election chances still remain good for the moment.
December, 1997 Santiago Fittipaldi, Managing Analyst
Technical Data
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